How banks fuelled stock prices

How do you explain these cases?

Zeal Bangla Sugar Mills has not paid out any dividend in its recent history, but the company's share prices increased by 172% in the last one year.

During the same time, Shyampur Sugar Mills saw a 262% increase in its share price, with no dividend declaration or change in its financial health – earnings or revenue.

Generation Next Fashions, another poor performer, saw a 200% price hike last year.

The overplay of banks has contributed to such unusual hikes in share prices.

Some banks invested in shares exceeding the stock investment ceiling of 25% of their capital set by banking law, while some others went for investments under the Tk200 crore special liquidity package for each bank, violating the central bank's conditions.

All these issues and many more incidents, such as buyers placing orders to snap up shares at above-market prices, have led the central bank to rationally guess foul play at work behind the recent rally in stock prices.

Other than circumstantial evidence, the banking regulators as well as some banks have identified a few cases. As part of such a purge, the NRB Bank has recently closed its chief financial officer for his alleged involvement in dubious share investment.

The bank is now conducting an investigation into this matter to find out who others were involved in the share scam.

Not in this bank alone, top officials in some more banks were also found involved in activities that jacked up share prices, creating price bubbles in the market, according to the central bank findings.

Because of the central bank's strict monitoring, the NRB Commewrcial Bank has recently been fined Tk23.5 lakh for overinvestment, violating banking law. The amount was the highest financial penalty to a bank in recent times. The Bangladesh Bank is now conducting a detailed investigation into the bank.

It is now thought that banks played a role in the recent price surges.

In the last one year when the overall economic activities were stagnant, only the stock market remained vibrant. Share prices of 140 listed companies, mostly small-cap and junk ones, increased by 100%-1200% in the last one year, putting retail investors at risk.

Share manipulation of the insurance sector was widely discussed among stock investors.

Shares of 48 out of 53 listed insurance companies gained prices between above 100% and 750% in the last one year, according to Dhaka Stock Exchange (DSE).

The prices of junk and small cap shares increased unusually without any fundamental reason or improvement in financial health or dividend declaration, which reflects that there was manipulation, said a senior executive of the Bangladesh Bank.

As the central bank worries about exposures of banks, there seems to be a pulling of the rope in opposite directions by the Bangladesh Bank and the stock market regulator the Bangladesh Stock Exchange Commission (BSEC).

While the central bank wants a cautious fund flow to the market, the BSEC naturally wants more money to flow.

For instance, the new generation Union Bank has recently been given approval for IPO (Initial Public Offering) on the condition that it will have to invest Tk200 crore in the stock market under the central bank's special liquidity support.

Although the central bank did not make it mandatory for banks to use the special liquidity package for stock investment, the BSEC did so for Union Bank.

Bangladesh Bank Governor Fazle Kabir also held a one-to-one meeting at his office with BSEC Chairman Shibli Rubayat-Ul-Islam on 7 September over banks' overplay and unusual price hike of junk shares.

Banks had been reluctant to invest in stocks since 2010 after incurring huge losses because of the market crash.

Later, in February last year, the central bank came up with a mega offer for banks to invest in stocks.

Banks were offered to invest up to Tk200 crore under the special liquidity support, which will not be calculated with the regulatory limit of 25% of their capital.

The decision was taken to increase liquidity supply in the stock market through banks' investment.

The banks were also given exemption from maintaining provisioning against the investment.

The initiative opened up an opportunity to bring fresh investment of Tk12,000 crore from all 59 banks in the country. Each bank could build up the Tk200 crore fund from their own source or take the money from the central bank's special scheme at only 6% interest rate.

Under the scheme, banks built up a fund of Tk4,000 crore and invested around Tk 1,700 crore from it over the last one year, according to the Bangladesh Bank.

The banks started to avail the facility from the middle of the last year after the lending rate came down to 7% owing to a huge excess liquidity of above Tk2 lakh crore. Call money rate came down to less than 1%.

The cheap money started to flow into stocks, making the DSE lead performer in the Asian frontier market.

However, the Bangladesh Bank has now strengthened its monitoring on stock investment of banks after detecting violations and overplay.

BB moves to rein in money flow to stocks

The Bangladesh Bank moved to rein in cheap money flow to the stock market by controlling excess liquidity.

As part of that, the central bank started to mop up excess liquidity through issuing Bangladesh Bank bills from August 9.

The Bangladesh Bank also asked banks last month to report short term loans on a daily basis. It is because banks were reportedly borrowing money from each other for a short term at less than 1% instead of taking loans from the call money market to invest in stocks.

With strengthened monitoring on short term loans, borrowers came back to the formal call money market, causing an increase in interest rate.

The call money rate, which was less than 1% in July, surged to above 1% in August, according to the Bangladesh Bank data.

How share price is manipulated

On 2 September, a buy order of 26,75,747 shares of Tallu Spinning Mills Limited was given at Tk15 each at the beginning of DSE trading when the selling price was Tk14.50. This is how a bulk amount of shares are ordered at a higher than market price to manipulate the share price. Each share price of the company is now trading at Tk15 – five times higher than in a year ago.

Tallu Spinning Mills, another performing company, saw around a 400% hike in its share price over the last one year.

On 25 August, a buy order of 108,43,553 shares of IPDC was given at Tk41.20 each in the pre-market, higher from the selling price of Tk38.50. The first buy order was worth Tk44.67 crore. Such a big order at a higher than market price created an artificial crisis for shares in the market, causing a price hike.